Microsoft Strategy Update: Consumer Products and Services

At this week's Financial Analysts Meeting, Microsoft executives made a compelling case for its continued focus on both consumers and business customers. The explanation comes amidst increased pressure for Microsoft to forego the more finicky and image-conscious consumer market for the more stable business market. But the firm says that would be a mistake.

Calls for Microsoft to abandon consumers are so intense that some are even calling for Microsoft to split into several companies, each based around a major product line. I've recommended that the firm shed its money-losing Xbox and Bing businesses, which together have brought several tens of billions of dollars of losses to Microsoft over the past decade.

But the company has shown no interest in either strategy. Instead, it has repeatedly argued that the synergies created between its many diverse businesses far outweigh the disadvantages of its size and complexity. And this week, it tried to explain why.

First up, Microsoft COO Kevin Turner dispelled the myth that the firm already makes all of its money from businesses. In fiscal year 2013, 61 percent of Microsoft's revenues came directly from businesses—55 percent from the enterprise and 6 percent from small and medium-sized businesses—while 39 percent came from consumers and OEM (the latter meaning "PC makers," which is really a combination of both consumer and business sales, but is mostly consumer).

The point? "[Microsoft is] a very balanced and diverse business," Turner explained. "Not only from a customer segment standpoint, but from a geographic and the theaters of operations where we operate, and also our products and services."

But with regards to the mix of customer types, it's important to remember that Microsoft is very successfully transitioning its products to the cloud. This includes pure cloud plays—on-premises servers like Exchange transitioning into cloud services like Exchange Online in Office 365—and hybrid offerings, like Office 2013, which is still installed on end user PCs but is now distributed and serviced like an online service, over the Internet. This move also includes licensing changes that are more akin to enterprise volume licensing than the old, traditional way of customers purchasing a single software version outright.

"We're bullish on how fast customers are moving to the cloud," Turner said, noting that Microsoft expects this market to exceed Gartner's prediction of being a $180 billion opportunity by 2015. And Microsoft's consumer cloud services—SkyDrive, Office 365 Home Premium, Xbox Live, Bing, and so on—experienced 13 percent user growth in FY 2013. 5.6 billion queries per month at Bing. 460 million MSN users. 48 million subscribers to Xbox Live. Over 300 million people using Skype for over 2 billion minutes per day. 400 million people on Outlook.com. 250 million on SkyDrive. And so on.

These are big and popular services. And they help Microsoft reach across to the business side of the fence. Apparently.

"These consumer services are all multi-tenant, at-scale, gigantic services that allow us to do a very, very good job on the enterprise services," Turner said. "And we've learned a ton about how to do these services at scale, how to manage the bandwidth, how to make sure that we have the right cost-effective solution that we would have never been able to do had we only concentrated on enterprise services first."

New OS lead Terry Myerson reiterated this view. "We're looking at consumer apps, we're looking at enterprise apps," he said. "We're looking at how the virtuous cycle works on other platforms, how it should work on our platform. And it really is a top priority for me and my team, and we're working it ... so many things, whether it be the applications or the devices, [are] common between the consumer and the enterprise environment."

And so did Julie Larson-Green (who otherwise didn't have much to say at this year's FAM). "We do believe that consumers drive a lot of what's coming into the enterprise," she said. "When I was in Office, Excel was brought into the enterprise because consumers liked Excel and brought it in over Lotus Notes. We've seen the same thing with the iPad. Consumers have the iPad and bring it into the business."

"We make products for people," Larson-Green added in what may actually have been the best line of the day.

"Yeah, it's really the key thing," Myerson agreed. "I think that so much applies to both [consumer and business], whether the user experience, the reliability. There's just a lot common across there. And so I think we're fortunate to be able to apply both domains across. And certainly for Windows, Windows is very much an enterprise product I would say, and it is very much an end-user product. There's so much of our effort, you know, the Windows we build is used on the client, it's used in the cloud, it's used in datacenters. And so having that diversity is essential to delivering the Windows franchise for Microsoft."

That said, I've argued recently that Microsoft doesn't actually realize a lot of real-world synergies between its consumer and business offerings. The key example is the dichotomy of Outlook.com and Outlook Web App in Office 365; these ostensibly similar products share almost zero commonality in user interface or infrastructure and underlying technologies. Microsoft is in effect developing both in isolation and doubling its efforts as a result.

They promise to do better.

"We want to be a family of devices with a family of services," Myerson noted. "When we think about delivering that family of services, the road is we approach that bottoms up and top down. Bottoms up we're embracing Azure in everything we do, and Azure broadly defined. That brings with it a number of capabilities which actually project all the way out to the end user. Likewise coming out top down, adopting common design language, adopting common navigation, adopting common taxonomy, we're absolutely committed to that and are making great progress across all the applications and services we build."

Microsoft is also moving into devices, of course, and much of that is consumer focused, though a better term may be "individual focused," in that they're products aimed at people, not companies. It has 12 years of experience with Xbox, a solid PC peripheral business, and now makes PCs under the Surface brand. It's recent purchase of Nokia moves Microsoft ever-closer to its dream of being a vertical solution provider, like Apple, that directly interacts with end users on the hardware side now as well, and not just on the software/services side. And, like Apple, Microsoft sees most of its big growth opportunities in devices as coming from mobility (though of course traditional PC use and the living room are in the mix as well).

I don't know. So far, this is just a lot of talk, and there are far more examples of an overly complex Microsoft remaking the same types of products over and over again than there are of any real synergies, especially those that cross the consumer/business divide. This needs to change.

Out in the real world, Outlook.com and Outlook Web App/Office 365 share virtually no commonalities despite being essentially the same offering. Ditto for SkyDrive and SharePoint Online/SkyDrive Pro. Skype and Lync. Even Windows and Windows Phone, despite recent changes, remain far apart in many ways. Why can't we run Windows Phone apps—especially games—on Windows—especially Windows RT—right now? It makes no sense.

Discuss this Article 9

The Xbox would be gone, since its NEVER made a dime. Sure since 2008 its made money annually up to 2012, but even then it was still 3 billion in the hole. Then Xbox One development put it deeper in the hole.

Time to sell off Xbox. I would also give Windows Phone until 2015 to reach 10% world wide market share or it would be gone as well.

Windows RT needs to go away. Microsoft needs a single OS for ARM based devices. Windows Phone should be renamed Windows Mobile again and have a single OS/App store for ARM devices of all sizes and shapes. This should have been the case when Windows Phone 7 launched.

I disagree about selling off Xbox... because the TV is the next battleground and Microsoft NEEDS to be there.

As for Windows RT running all mobile devices... I agree that that's where they're headed and that it needs a more obvious name, like "Windows Mobile." And while some bloggers say "Windows Mobile" has a lot of baggage from a few years ago, the reality is that most people (probably 95% of normal people) have no idea about the old Windows Mobile or that it ever existed... therefore, the brand is not really tainted.

So... Windows RT becomes Windows Mobile and runs mobile apps (and has NO DESKTOP). Windows Pro also runs desktop apps. Very simple & easy to understand for the average consumer.

It strikes me that Microsoft's version of "the cloud" would be a much better fit for businesses that are hard-wired for Internet than it would be a good fit for either desktop consumers--or for individual cell-phone customers. Normal desktop-bound, wired consumers generally are able to upload at 1/10th their download speeds, and they'll have data caps, too, though not nearly so egregiously restrictive as those forced on individual cell-phone customers. With many if not all of the wireless cell-phone data caps I've seen ringing in at a mere 5GB before exorbitant extra charges begin to accrue, as caps are predicated on the basis of uploads & downloads combined, it doesn't strike me as a particularly consumer-friendly technology. And who wants to think about typing papers and rolling spreadsheets on a 4"-11" screen, sans keyboard? Not I. Businesses with good wired plans that are very fast, don't discriminate between upload & download speeds, and have unlimited data caps might be the perfect cloud customers, however.

Even so, business isn't going to lightly rid itself of local backups & storage. And desktop consumers are still going to prefer local storage for their software, imo. It's human nature, to a large extent--something I thought Microsoft *used to* understand very well.

I suppose I could find a PC-version of "Angry birds" to while away the scant hours I could devote to it, but...that sort of "game" is not my cup of tea to begin with. It's fine for cell phones and other devices that have maybe 1/1,000th the computing power of my desktop at home, but I'd get bored with the great majority of cell-phone games very quickly. It's amusing, but many of the so-called "blockbuster" cell phone games are very poor and incomplete ports of PC games I was looking at more than a decade ago. In short, the proper market for cell-phone games is cell phones,imo...;)

So, Paul, do you still think Microsoft should have been broken up when the antitrust trials were on? Do you think they'd be in a good position now if that had happened?

Just remember: Microsoft was touted as being cloud-averse only a few years ago, and now they are a major player with Windows Azure and Office 365 - and a lot of those Office 365 customers are now consumers too, let's not forget. I don't think you can argue now that they should still be broken up, because then all you have is a broken company, and Microsoft is still the big stable horse in the computer industry. They are correct in their assessment of IT trends though: the industry is moving to a thin management strategy with BYOD, and you can't honestly say that dividing consumer and business lines into separate companies will work for BYOD.

Yes, the company should have been split up. Today, it's even worse: Much bigger and complex hierarchical corporate structure, way more calcified, and too unwieldy.

One example: A company that objectively wanted Office to succeed would never have ignored Android and iPad this long, nor would it have created a cloud offering that wasn't full-featured and with offline usage. Everything Microsoft does it done with competitive caveats because it must protect other businesses.

Microsoft says it's "serious" about mobile... but then keeps following the same strategy--charging OEMs for WP OS & Windows RT when they should be licensing it for free (or close to it). The same goes for the new Surfaces... which are rumored to be about the same price as last year! What are they thinking?!?

I think they're just being stubborn (and also stupid), and if they follow the same strategy as last year, they will have the same results.

The OEMs have figured it out. They're releasing tablets at more competitive prices. Maybe that's where the sales will be. Maybe Microsoft is content just playing in the high end... at least for tablets. But since the Surface & Nokia tablets are the only RT tablets out there, and since RT tablets didn't sell well last time... you'd think they'd lower the price. *sigh*

But now Gates needs to leave Microsoft Chairmanship, and allow the rest of the Microsoft Board and new CEO to move on my ditching excessive "Windows" branding which is clouding all sensible strategy and marketing decisions in the consumer space.

I bought a Windows Phone not because I thought it was the best value at present, but mostly on the expectation ("obvious", to my mind) that an MS smartphone would have a more fluid interaction with my work and home PCs, which were both running an MS operating system, than devices running Android or Apple.

All the stuff that is being said about the direction of MS and making all of their devices inter-operate more seamlessly sounds great, and, again, seemed obvious.

My problem is that, while all the right things are being promised in terms of integration, precious little has actually been delivered.

Paul, I was wondering what your take is on whether Myerson, now that he has installed his own crew as his lieutenants, will have any greater success at executing on MS's vision than the old regime.

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